An American influencer on holiday in South Africa recently posted a viral video highlighting traveler misconceptions about Africa. In the video, she expressed astonishment at the number of cashless transactions taking place. “South Africa takes more Apple Pay than even in the United States,” the TikToker said. As one of the most industrialized countries on the continent, cashless payment systems have been commonplace in South Africa for several years. The rest of the continent, however, is still operating with mostly cash and this is the central challenge to the wider expansion of financial technology across Africa.
In a new report, Mckinsey forecasts the African fintech sector to grow dramatically in the short term. Fintech revenue could reach $30.3 billion by 2025, which is eight times higher than revenue in 2020, as more Africans gain access to the internet. Roughly two-thirds of Africa’s 1.3 billion people don’t have a bank account or full access to financial services according to McKinsey. More than 90 per cent of all financial transactions are cash-based, which creates a major opportunity for fintech companies and governments.
Breaking the continent’s addiction to fiat cash appears to be the last barrier to a full-blown digital revolution considering Africa’s fast-growing population and smartphone penetration. But signing up people for bank accounts is much easier said than done. Moving to a cashless society requires advanced identification standards such as biometrics.
The introduction of these systems has been slow and fragmented in Africa. In many cases, the cost of setting up and maintaining a biometric database is prohibitive. This problem was recently solved in India, which has ambitiously embraced a cashless future, through the privatization of its national biometric identity system known as Aadhaar. The system can be used for many different services across the economy, such as opening bank accounts, withdrawing money from ATMs, applying for a driver’s license, and receiving government subsidies. But Aadhaar hasn’t been without its without its critics who have highlighted several serious privacy and cybersecurity flaws with the database.
India has taken other major steps to pull its cashless future forward. In November 2016, the government abolished high-value currency notes (roughly 86 per cent of the notes in circulation) virtually overnight. The move created unprecedented headaches for Indians that held savings and retirement funds in large notes under their mattresses. At the same time, cashless platforms like PayTm saw surges in traffic as Indians rushed to new technologies to store value. The circulation of fiat currency in India continues to decline year over year as more people keep their money in digital form.
The relative success of Aadhaar and the abolishment of currency notes underscore the vital role that governments play in any cashless transition. Innovation in fintech will always be shaped by technological advancements but a public-private partnership is needed to transform the sector. The primary function of government should be the establishment and maintenance of a viable biometric identification system as well as the provision of infrastructure.
In Africa, smartphone infrastructure is critical to any cashless transition. According to the Wall Street Journal, the ubiquitous use of cellphones in Africa has enabled the creation of mobile money services that allow customers to carry out financial transactions without ever setting foot in a bank. These platforms have helped Kenya nearly double the share of adults with a mobile money account to 82 percent since 2011. Once you have a new customer in the formal financial sector, it’s much easier to offer access to health care and forms of insurance, which opens up other new sectors for impressive growth.
The entire premise of a shared cashless future is not without its critics. Fiat cash affords a certain amount of anonymity that digital payments don’t, by design. Deeper integration between the financial sector and biometric identification systems means that governments will have an extra amount of control over citizens, which can be a good or bad thing depending on the government.
With that being said, a shared cashless future is inevitable to a degree. The success of payment platforms such as Apple Pay and the rise of central bank digital currencies demonstrate the (unavoidable) direction the world is heading. The enormous value in Africa’s transition to cashless systems is waiting to be unlocked by fintech companies that have experience in the African market such as those based in the Middle East and China.
Given their own experience with biometric databases and experience with cashless platforms, companies in the UAE and Israel are particularly suited to aid this transition. For this transition to take shape in the forgotten corners of the continent, African countries will need to lean on other countries that have ample experience in setting up their own platforms. Middle Eastern countries are best suited for this task given their growing knowledge economies and experience in biometrics. While Africa might be the last continent to fully embrace the cashless future, it will be one of the largest drivers of growth in fintech anywhere in the world. Investors and companies on the periphery should pay close attention.
Joseph Dana is the former senior editor of Exponential View, a weekly newsletter about technology and its impact on society. He was also the editor-in-chief of emerge85, a lab exploring change in emerging markets and its global impact. Twitter: @ibnezra.